HOB Biotech GroupLtd (SHSE:688656) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, HOB Biotech Group Corp.,Ltd (SHSE:688656) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for HOB Biotech GroupLtd

What Is HOB Biotech GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 HOB Biotech GroupLtd had CN¥105.1m of debt, an increase on CN¥50.0m, over one year. But on the other hand it also has CN¥105.1m in cash, leading to a CN¥79.1k net cash position.

How Healthy Is HOB Biotech GroupLtd's Balance Sheet?

According to the last reported balance sheet, HOB Biotech GroupLtd had liabilities of CN¥184.0m due within 12 months, and liabilities of CN¥12.8m due beyond 12 months. Offsetting this, it had CN¥105.1m in cash and CN¥58.9m in receivables that were due within 12 months. So its liabilities total CN¥32.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that HOB Biotech GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.05b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, HOB Biotech GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, HOB Biotech GroupLtd grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is HOB Biotech GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HOB Biotech GroupLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, HOB Biotech GroupLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that HOB Biotech GroupLtd has CN¥79.1k in net cash. And it also grew its EBIT by 8.8% over the last year. So we are not troubled with HOB Biotech GroupLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - HOB Biotech GroupLtd has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.